Small Retailers need disruptive Fintech to reduce working capital finance

mom & pop

By Bernard Lunn

Small retailers are the backbone of the economy and yet they are the last place getting value from Fintech innovation. This is a massive opportunity, but not an easy one to crack. It needs some disruptive innovation.

Working Capital Finance for small business is the massive market we have been focused on this week in two earlier research notes (here and here).

We see three distinct categories within the overall market for Working Capital Finance for small business. I hesitate to call them niche markets because they are so big:

  1. Supplier to Global 2000. This is where Supply Chain Finance (SCF) rules. This works. You get credit based on the credit rating of the buyer, so the APR is low.
  1. Supplier to SMB. This has historically been the province of Factoring (or a variant called Invoice Discounting). The APR cost is high and it can be a cumbersome process, because neither the buyer nor the seller has a credit rating. There have been many markets to trade these invoices, but the biggest conceptual breakthrough has been the move by Prime Revenue to to go beyond the Global 2000 (which already have a credit rating) into the mid market using statistical modeling based Insurance as a proxy for an individual credit rating by partnering with AIG.
  1. Supplier to consumer aka Retailer. This is the world of Merchant Cash AdvanceThe merchant gets an advance on future credit card revenue. The APR is even higher than for Factoring/Invoice Discounting. It is like PayDay Loans; it is OK if used in an occasional emergency, a business killer if used regularly. This is scalable through automation so there have been a few venture-backed startups in this space.

Big Retailers obviously do not use this; one cannot imagine Walmart using merchant cash advances. That is why this research note is about Small Retailers, the backbone of the economy.

One thing that confuses people across all these types of working capital finance is that lenders often quote a rate for say 30 days. This could be the time when the invoice would normally be paid or when a merchant cash advance is collected from future credit card receipts. You might hear 2% quoted (for 30 days), but that translates to 24% APR (12 months * 2%). Some lenders and platforms fight against this normalization to APR, but only a desperate or financially illiterate borrower would fail to calculate APR.

The fitssmallbusiness site lays into merchant cash advances;

“Typically, merchant cash advances are extremely expensive with APRs ranging from 29 % to 132 %, so we don’t recommend them unless you’ve exhausted all other ways to get a business loan.”

So is there any alternative to merchant cash advances? One can see Square jumping into the fray with Square Capital and that will create competition, which is good. However that sort of sustaining innovation tends to produce something like a 10% improvement. When retailers are paying 29 % to 132 %, they need a lot more than 10% improvement. They need a disruptive proposition that cuts that APR by 90%. That would let retailers borrow at 2.9% to 13.2%. That seems ridiculous, but all disruptive innovation seems ridiculous when it first appears. Of course the lower amount of 2.9% is only for the best quality credit worthy retailers (which seems reasonable given our ZIRP base rate foundation). The problem is simply that there is no efficient scalable way to measure credit worthiness of retailers. If anybody has seen something like this, please tell us (in comments or on Twitter).

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.



  1. Bernard

    Great food for thought as ever. A small retailer might use their ebay trading history as a guide to credit worthiness. Kabbage is a good example of this.

  2. Love the work you do, without sounding like Mr grumpy, I personally find the snow effects my ability to concentrate on the text. Hope I am the only one.

  3. It will disapear automatically as soon as 2016 kicks in – or earlier if somebody else gives me the same feedback.

  4. On a more relevant note, we’re working on something in this space and would love to connect with you to chat if you are open to it. We’re not ready to talk about it broadly yet but we feel we’re on the path. Let me know.

    • Thanks Kevin, we only cover startups and initiatives where there is some public information that we can link to.

  5. Great content as usual! The reason funders like to refer to it as a 30 day rate is because funding is drawn on a spot basis so APR is not a true reflection of costs. The customer having control over which invoices they wish to fund means they can control the APR also.

    Unfortunatley with factoring it is not the cost of funding (APR) that make this kind of finance expensive. It is the hidden fees and charges in complex contracts. Borrower beware!

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